New measures to restore confidence in benchmarks following LIBOR and EURIBOR scandals

The Commission has today proposed draft legislation to help restore confidence in the integrity of benchmarks. A benchmark is an index (statistical measure), calculated from a representative set of underlying data, that is used as a reference price for a financial instrument or financial contract or to measure the performance of an investment fund. The new rules will enhance the robustness and reliability of benchmarks, facilitate the prevention and detection of their manipulation and clarify responsibility for and the supervision of benchmarks by the authorities. They complement the Commission’s proposals, agreed by the European Parliament and Council in June 2013, to make the manipulation of benchmarks a market abuse offence subject to strict administrative fines (see MEMO/13/774).

The manipulation of the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) has resulted in multi-million euro fines on several banks in Europe and the US, and allegations of manipulation of commodity (e.g. oil, gas and biofuel) and exchange-rate benchmarks are also under investigation. The prices of financial instruments worth trillions of euro depend on benchmarks, and millions of residential mortgages are also linked to them. As a result, benchmark manipulation can cause significant losses to consumers and investors, distort the real economy, and undermine market confidence.

Internal Market Commissioner Michel Barnier said: “Benchmarks are at the heart of the financial system: they are critical for our markets as well as the mortgages and savings of millions of our citizens, yet until now they have been largely unregulated and unsupervised. Market confidence has been undermined by scandals and allegations of benchmark manipulation. This cannot go on: we must rebuild trust. Today’s proposals will ensure for the first time that all benchmark providers have to be authorised and supervised; they will enhance transparency and tackle conflicts of interest. As a result, the integrity as well as the continuity and quality of key benchmarks will be ensured."

Key elements of the proposal

The proposal is in line with the principles recently agreed at international level by the International Organization for Securities Commissions (IOSCO) and covers a broad variety of benchmarks, not just interest rate benchmarks such as LIBOR, but also commodity benchmarks for example. It covers all benchmarks that are used to reference financial instruments admitted to trading or traded on a regulated venue, such as energy and currency derivatives, those that are used in financial contracts, such as mortgages and those that are used to measure the performance of investment funds. It seeks to address possible shortcomings at every stage in the production and use of benchmarks.

The ultimate objective is to ensure the integrity of benchmarks by guaranteeing that they are not subject to conflicts of interest, that they reflect the economic reality they are intended to measure and are used appropriately.

In particular the proposal:

improves the governance and controls over the benchmark process

The activity of the provision of benchmarks will be subject to prior authorisation and on-going supervision at national and European level. The proposal requires that administrators avoid conflicts of interest where possible, and manage them adequately where they cannot be avoided.

improves the quality of the input data and methodologies used by benchmark administrators

It requires that sufficient and accurate data be used in the determination of benchmarks, so that they represent the actual market or economic reality that the benchmark is intended to measure. The data should come from reliable sources, and the benchmark should be calculated in a robust and reliable way. This also means that transaction data are to be used when possible with verified estimates allowed when it is not.

ensures that contributors to benchmarks provide adequate data and are subject to adequate controls

The administrator will produce a code of conduct which clearly specifies the obligations and responsibilities of the contributors when they provide input data for a benchmark. These include obligations on handling conflicts of interest.

ensures adequate protection for consumers and investors using benchmarks

It enhances transparency of the data used to calculate the benchmark and of the way in which the benchmark is calculated. There will also be a statement explaining what the benchmark intends to measure and what its vulnerabilities are. The proposal also requires banks to assess suitability for consumers where necessary, for instance when drawing up mortgage contracts.

ensures the supervision and viability of critical benchmarks

Critical benchmarkswill be supervised by colleges of supervisors, led by the supervisor of the benchmark administrator and including the European Securities and Markets Authority (ESMA). In cases of disagreement within the college, ESMA will be able to decide by binding mediation. Other additional requirements are imposed on critical benchmarks, including the power for the relevant competent authority to compel contributions.

Central banks that are members of the European System of Central Banks are excluded from the scope as they already have systems in place that ensure compliance with the objectives of this draft regulation.

Annexes contain more detailed provisions on commodity benchmarks and interest rate benchmarks. Benchmarks whose input data is provided by regulated venues are released from certain obligations to avoid dual regulation.